Fitch Affirms Good Shepherd (Pennsylvania) Outstanding Debt; Outlook Remains Positive

CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms its underlying rating on Lehigh County General Purpose Authority revenue bonds, (The Good Shepherd Group), approximately $111.9 million outstanding revenue bonds. The Rating Outlook remains Positive.

Good Shepherd's investment bankers have ask that Fitch not assign an underlying rating to the series 2008 variable rate revenue bonds, which will current refund Good Shepherd's 2000 bonds outstanding. The series 2008 issue will current refund the approximate $12.76 million outstanding series 2000 bonds plus pay costs of issuance. The series 2008 bonds will be issued as variable rate revenue bonds and are expected to be secured with a direct pay letter of credit from Wachovia Bank, N.A. (rated 'AA-'; Outlook Stable by Fitch).

In conjunction with the issuance of the 2008 bonds, Good Shepherd plans to convert its outstanding $29.395 million in series B of 2007 auction rate securities to variable rate demand revenue bonds secured by a stand-by bond purchase agreement from Wachovia Bank, N.A. The series B of 2007 bonds are expected to be rated closer to the sale date based on the credit of Wachovia Bank. The floating to fixed rate swap associated with the series 2007B bonds will remain in place. The series B of 2007 bonds are insured by Assured Guaranty, whose insurer financial strength is rated 'AAA' by Fitch. The 2007B conversion of auction rate securities are expected to sell the week of April 21, 2008 via negotiation.

The rationale for affirming the 'A' rating is supported by Good Shepherd's excellent liquidity position, solid debt service coverage, and leading market share for rehabilitation services in its core service area. Through the six month interim financial period ending Dec. 31, 2007, Good Shepherd's $166.5 million of unrestricted cash representing an excellent 623 days cash on hand and 126% cash to debt. In the same period, Good Shepherd has demonstrated robust excess margins of 21.3% and EBIDTA margins of 29.8% respectively, well above the 'A' rated medians of 5.6% and 12.1% respectively. Good Shepherd has solid coverage of pro forma maximum annual debt service (MADS) at 4.6 times(x) through the same period. Finally, Good Shepherd garnered a leading 62% inpatient market share and 40% outpatient market share for rehabilitation services in the Lehigh Valley.

The Good Shepherd Penn Partners (GSPP) joint venture partnership between Good Shepherd and the University of Pennsylvania Health System at the former Graduate Hospital in Philadelphia is progressing on budget, which is scheduled to open on time in July 2008. Entering a new market does present some risk, however, Fitch believes the combined credit strengths of Good Shepherd and UPHS will provide a solid foundation for success for the GSPP venture.

The Positive Rating Outlook reflects Fitch's expectation that Good Shepherd will maintain or improve its current level of operating profitability over the medium-term. Fitch believes the strategic benefit of the UPHS partnership will further strengthen the overall credit profile of Good Shepherd. Further, Fitch believes that historical demonstration of management practices have been strong in the face of regulatory changes; which have mitigated slightly reducing the '75% rule' to a '60% rule'. With the '75% rule', the Centers for Medicare and Medicaid Services (CMS) stipulated that 75% the inpatient activity of a rehab facility had to be classified within 13 diagnostic related groups. That rule has been decreased to 60%, which allows facilities like Good Shepherd the ability to treat Medicare patients and bill CMS for a broader array of clinical classifications. Fitch expects this rule change to positively impact Good Shepherd's operating statistics over the near to medium term.

Ongoing credit concerns include Good Shepherd's relatively high debt leverage relative to its size, the general operating risks associated with entering the Philadelphia market, continued regulatory scrutiny from CMS and Good Shepherd's historical reliance on investment income to offset operating shortfalls. Through the interim six month period ending Dec. 31, 2007, Good Shepherd's debt leverage remained relatively high with pro forma MADS as a percent of revenue 8.4%, compared to Fitch's 'A' rated median of 3.1%. However, Fitch does note that this higher than median leverage is offset by Good Shepherd's strong liquidity measures and its historically solid EBIDTA performance leading to coverage of MADS by EBIDTA of over 4.0x. Although progressing on-time and on-budget, there are inherent business risks associated with the GSPP venture, especially one in the historically competitive Philadelphia market. Good Shepherd has always relied on its robust investment returns to offset any operating losses. However, Fitch notes this as an ongoing credit risk due to the overall vulnerability of market returns, especially in light of the recent downturn in global markets.

The Good Shepherd Group is headquartered in Allentown, PA and consists of two IRFs (82 beds), a LTCH at Lehigh Valley Hospital-Muhlenberg (32 beds), two long-term care facilities (159 beds), 18 owned outpatient rehabilitation centers, an owned physical medicine and rehab physician group practice (12 MDs), and two rehab management/service contracts. Good Shepherd also provides work and vocational services. Good Shepherd's disclosure to Fitch has been excellent in terms of content and timeliness. Fitch receives quarterly disclosure that provides a consolidated balance sheet, income statement, statement of cash flows and utilization statistics. Additionally, Good Shepherd has covenanted to provide quarterly disclosure within 45 days and annual audits within 120 days of fiscal year-end and notices of material events to bondholders, which is viewed positively by Fitch.

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